Online Poker Faces Assault From the Feds

On family trips back to her grandparents' town in Chile, Paula Barros spent long nights battling it out with her relatives for penny stakes. She was calling bluffs before she turned 10.

Later, as a poor actress trying to land gigs in blustery wintertime Chicago, the recent Florida International University grad quickly realized she had the patience to wait out hands that her wealthier online opponents lacked.

Put the two together and she had a winning recipe for online poker. In 2009, within a month of signing up for PokerStars — then the largest online table — Barros was consistently winning almost every pot. The games paid out only around $20, but she spent winter nights hunched over her laptop, grinding out four or five wins before morning.

"If I didn't make an audition or get a part, online poker would give me the extra cash I needed for the week," Barros says.

By the time she came to Miami in late 2010, she had moved on to the higher stakes and bigger rooms at PokerStars. She kept refining her technique: betting only when she had the best position, far from the dealer; timing her games during the day, when most Americans were at work and easier-to-beat Europeans and Asians were stocking the rooms; looking hard for "donkeys" — obviously wealthy players throwing around chips and bets with little skill.

Between February and April, she cleared more than $1,000, scoring cash while her boyfriend played PlayStation games next to her on the couch in her Kendall apartment. "It was awesome," Barros says. "Poker supported my acting career. I could get to auditions instead of working some day job."

Then came April 15, 2011. The night before, Barros had won $200, cashed out $150, and left the rest in her PokerStars online account to play the next morning. But when she logged on, an ominous message appeared: Your account is unavailable because your government doesn't allow online poker. "I felt like I was living in a communist country," she says. "I couldn't believe 'my government' would put an end to this entire online gaming world just like that."

Yet that's exactly what happened on a day that the poker world now refers to as Black Friday. In one swoop, the U.S. Department of Justice seized the assets and shut down the three biggest companies serving the American market — PokerStars, Full Tilt Poker, and Absolute Poker — charging them with bank fraud, money laundering, and illegal gambling.

Tens of thousands of American players such as Barros woke up to find their accounts suspended, their millions of dollars frozen. For the the thousands of people who made a regular living with trump cards and flushes on the web, a whole way of life disappeared overnight.

The feds had shuttered a $2.5 billion American industry at the height of the recession, all because of an obscure provision sneaked into a spending bill by two conservative politicians working with Las Vegas lobbyists.

Today, players are still trying to adjust to life without online poker while the feds and states fight over whether online gaming has a place in the United States.

"They took away my way of life, and most people don't even realize it happened," Barros says. "Why can't I do what I want with my own money online? Why can't we play poker with the rest of the world?"

Hardly anyone noticed when the Unlawful Internet Gambling Enforcement Act passed in 2006. Moralists and casinos, which were trying to protect their turf, had been pushing it for years without luck. That's when Republican senators Bill Frist of Tennessee and Jon Kyl of Arizona got the bright idea to stuff it into a port security bill as a last-minute amendment.

In true Washington, D.C., fashion, most legislators never read the final bill. Many didn't even know an anti­gambling measure was in it. But in one secretive stroke, the two senators had declared war on poker.

It didn't actually outlaw online play. Kyl and Frist preferred their attack on the American pastime to remain surreptitious. Going after individual players would have meant a huge backlash. Instead, they targeted the financial institutions that handled the sites' money, making it illegal to deal in gambling proceeds.

Party Poker, the world's largest site, decided to cash in its chips. It agreed to pay a $105 million fine and leave the American market in exchange for not being prosecuted.

That left the world's most lucrative market up for grabs. PokerStars and Full Tilt, also-rans at the time, were quite willing to step into the breach despite the legal risks.

Why not? PokerStars, based on the Isle of Man, and Full Tilt, headquartered in the U.K.'s Channel Islands, figured they were outside the reach of U.S. prosecutors. It wasn't long before the two companies had cornered some 70 percent of the American market with revenues of nearly $2 billion a year.

But because the feds were squeezing banks and credit card companies, finding payment processors to handle the gambling sites' money grew increasingly difficult.

"By early 2007, suddenly the payment options are becoming much more tricky for PokerStars and Full Tilt," says Melinda Sarafa, a New York lawyer who has represented gamblers. "That's where they're starting to look into alternative providers."

The feds' pressure was working. By 2009, an audit of Absolute Poker revealed that almost one-third of its revenue went to disguising the money trail.

Says Sarafa: "The allegation is that the companies tried to find banks that were essentially in distress, providing them with a very lucrative lifeline, and that the transactions were disguised as other types of transactions so it wouldn't raise regulatory eyebrows."

Some congressmen, realizing that playing a few hands of poker after work wasn't exactly the height of fiendishness, tried to fight back. Rep. Barney Frank (D-Mass.) introduced a bill to legalize online games.

But while that measure was winding through the House, the U.S. Attorney's Office of the Southern District of New York was pressing ahead. In 2009, it filed charges against Allied Systems and Account Services for processing poker money. The feds seized $34 million owed to 27,000 players.

The sites reimbursed their customers and rolled on. PokerStars and Full Tilt discovered that SunFirst, a struggling Utah bank, was willing to handle the payments in exchange for fees and an investment.

But the feds killed that deal a year later. They also quashed Full Tilt's attempts to make similar arrangements with two Illinois banks.

Full Tilt's problems were multiplying. Believing that their revenue stream would soar eternally, its owners had pulled $444 million in profit from the business over the previous four years. But when the government began seizing their payment processors' funds, the company had no war chest to cover the losses.

By last March, its customers held $390 million in their accounts. But Full Tilt had only $60 million in the bank to cover them. When the feds seized the company's assets a month later, American players alone were owed $150 million. The government accused the company of running a "global Ponzi scheme."

Four summers ago, Maxwell Fritz was making minimum wage serving cotton candy and curly fries at an amusement park. He had just finished his first year at Princeton, where he was studying to become a math teacher.

Fritz had played online casually with friends back in high school. He had turned a few hundred dollars profit, and that planted the seed for the next summer's job. It had to pay better than minimum wage.

He made $10,000 after school let out, so he continued gambling during the school year. Over 18 months, while still attending Prince­ton and working his teaching internship, Fritz took home $100,000. Over the next six months, he would grab $200,000 more.

Then Black Friday hit. Suddenly, Fritz had not only lost his income but also $65,000 that was seized from his Full Tilt account.

He was among the fortunate to recover quickly. A fellow player provided a reference that allowed him to move from one kind of gambling to another: Wall Street.

"I figured if gambling online is illegal, I might as well go to legalized gambling in the form of the stock market," Fritz laughs. A friend had gone to a Wall Street firm and "just blew the doors off, and he said what he learned in poker really helped him. They were like, 'Well, we need to hire more poker players.' "

For Michael LaTour, the game was a way out of unemployment. The Syracuse man landed a job out of college selling mortgages and personal loans for American General Finance. But a year later, spectacularly inept bets by American General's parent company, AIG, put him back on his ass.

"There weren't many jobs out there, and I'd been on unemployment for a while," LaTour says. "I saw some people being successful at poker, and I decided if I was ever going to seriously take a shot at it, now would be the time to do so."

He played for two years, earning $50,000 in 2010. He was doing much better last year, averaging $10,000 a month until the feds came calling. In an instant, the $35,000 in his PokerStars account was seized.

"The days after it was really a panic," he says. "Nobody knew what was going on. It's been draining emotionally."

If he and his girlfriend hadn't bought a house, LaTour might have gone to Canada. Instead, he has taken the Syracuse police officer exam, but the academy doesn't offer classes until April. Two years after pulling himself off unemployment by his wits, he's back to searching for a job.

"This isn't something I wanted to do my entire life," he says, "but the money was out there, and it made more sense than any entry-level job just because of the potential to win such huge amounts of money."

Players weren't the only ones thrown out of work. The feds blew up an entire industry. In 2003, Michael Minkoff started a business that handled the shipping of poker books and videos sold on websites. His Las Vegas company also did freelance video production. It was a modest affair, employing three people and a passel of part-time help.

Then came Frist and Kyl's stealth attack in 2006. Sites began closing and paring costs, hurling little guys like Minkoff to the side of the road. Black Friday nearly finished him. At the height of his success, he was moving more than a thousand books a month. Nowadays, he sells fewer than 50, hardly enough to employ himself part-time.

Though the government wiped out the major American sites, a few remain, most notably Bovada and Merge Gaming Network.

The volume is much lower, and it's difficult to get paid. All sites have severe restrictions on how much and how often players can withdraw money from their accounts. Merge allows players to take out only up to $2,500 once every six to eight weeks. And many players find it difficult to add money to their accounts because credit card companies often reject the transactions.

After Black Friday, players such as Walter Wright began gambling on Merge just to salve nerves made raw by an empty wallet and a squealing baby. Wright had been an online-poker superstar, winning more than $100,000 a year at his peak. When Black Friday hit, he was stuck in North Carolina, out of a job, living with his in-laws, and with no way to provide for a family of four.

He and his wife went to Florida for a live World Poker Tour event, but he didn't play well. When they returned to North Carolina, they didn't even have enough money to get their dogs out of the kennel.

With their marriage stretched to its breaking point, Wright went to Costa Rica just before Thanksgiving. A friend agreed to front him a roll of cash, pay his airfare, and cover his rent for a few months.

Costa Rica has become a magnet for Americans. Wright lives in an apartment complex with other online players. The country's tourist-friendly economy makes it a logical landing spot for those like Wright. Since Black Friday, companies such as Poker Refugees have sprung up to help players obtain visas, bank accounts, and apartments in Costa Rica.

But a larger question remains: Why are the feds chasing honest, taxpaying citizens out of the country?

Congressman Frank denounced the crackdown as an "incredible waste of resources," wondering why the feds felt compelled to protect "the public from the scourge of inside straights."

After all, for most of the nation's estimated 2 million online players, poker is little more than leisure recreation. And those who made their living from it seemed to personify the American spirit, providing for families by creating livelihoods from their wits.

There's also the question of why conservatives such as Frist and Kyl would push a law so lush with the dreaded nanny-state overtones. Frist declined to comment about his motives. Kyl didn't respond to repeated interview requests.

Most players cynically dismiss the senators' move as a strong-arm play. The feds want their protection money — i.e., taxes — and won't let the ride continue until someone pays up. But because government moves in slow motion, it has left a multibillion-dollar industry to rot from atrophy. Any remedy will likely take years.

"It's really frustrating to me," LaTour says. "It just seems they weren't seeing any of that money that was going out there so they want to set it up so they can tax it. But the longer this takes, the more there will be people like me who just give up on it and move on with our lives to find another way of making a living. I've pretty much stopped waiting around."

A solution seems rather simple. Because everything is handled electronically, internet poker offers the possibility of instant taxation of winnings. And the feds could easily force sites operating in the U.S. to pay American taxes for the privilege of doing business here.

Yet the average poker enthusiast doesn't employ a battery of lobbyists on Capitol Hill. And even if he did, he'd still be confronted by the moralists who believe any form of gambling is a sin.

"We're a pretty small minority," Wright says. "We don't have a big voice. We need to be louder. But we're talking American politics. We know it's going to take longer than it should, they're going to find a way to screw people, and they're probably going to make the taxing situation really complicated."

Within a month of the federal crackdown, PokerStars returned $100 million to U.S. players and continued to operate abroad. Barros, like other PokerStars players, was given back the several hundred dollars that was frozen in her account on Black Friday.

Full Tilt players weren't so lucky. The company was cleared to offer returns but never did, because it doesn't have the money. Dozens of serious players in South Florida lost thousands in the Full Tilt crackdown, says Lou Stadler, president of the Miami Poker Society.

"Banks fail for not having sufficient revenue to cover customer deposits all the time," the company's lawyer, Jeff Ifrah, said at the time. "No one refers to such failures as Ponzi schemes. And there was no Ponzi scheme here." The court battle rages on.

This fall, a French company, Group Bernard Tapie, stepped in to buy Full Tilt for $80 million, promising to pay off the debts to international players. The feds are working to ensure that Full Tilt pays back American players. They've announced no timetable for repayment.

Absolute Poker — formed by four frat brothers at the University of Montana — wasn't liquid enough to continue either. None of its players has been reimbursed.

In December, Absolute Poker cofounder Brent Beckley pleaded guilty to lying to banks about the nature of his transactions. He's expected to receive 12 to 18 months in jail. His accomplice, Ira Rubin, ran a payment-processing company in Costa Rica that disguised gambling proceeds through fake merchants and suppliers. He pleaded guilty in January and is expected to receive up to two years in prison.

Rumors have been circulating that Absolute Poker will repay players soon, though payouts may be as little as 25 cents on the dollar.

"If you had a... state-regulated system, that wouldn't happen," says Rep. Joe Barton, a Republican from Texas. He's also pushing a law to legalize online poker. "This is one of those rare congressional bills that's not a Republican-Democrat issue. There are people for it and against it on both sides, but there are much more people for it. If it came up on the floor of the Senate on a majority-vote wins, it would pass. Whether it has 60 votes, I just can't tell you."

The general sentiment, from players to politicians, is that something will get done — eventually.

Sandy Becher, an attorney based in a penthouse along the Miami River, is among the nation's experts on online-gaming law. He had his own brush with federal crackdowns in 1998; back then, he was in-house counsel for SBD Global, an early online-poker firm based out of Panama. In a move similar to Black Friday, the feds shuttered the firm; Becher eventually negotiated a financial settlement. Today, Becher says he thinks the Obama administration will create a framework for online poker in the near future.

"I have a very strong sense it will be regulated and taxed in the next 12 months," Becher says. "That comes from talking to legislators and operators and other attorneys and seeing the trend from the Justice Department to the needs of states in this difficult financial time."

In the meantime, poker has gathered some powerful advocates. Casinos that once guarded their turf are hoping to get in on the online action. They're pushing Senate Majority Leader Harry Reid to get something done, but the prospect of new revenue sources is anathema to many Republicans. They squashed Reid's attempt to pass online-poker regulation in 2010.

It might come down to the states legalizing it within their borders (much like medical marijuana) and daring the feds to step in. Nevada has already begun issuing online-gambling licenses. Washington, D.C., passed a plan for running its own online-poker site. And in December, the Justice Department reversed its longstanding view that the 1961 Wire Act banned online gaming, a move many experts see as opening the door to state-regulated poker.

If you like this story, consider signing up for our email newsletters.

SHOW ME HOW

Newsletters

SUCCESS!

You have successfully signed up for your selected newsletter(s) - please keep an eye on your mailbox, we're movin' in!

Eleven months after Black Friday, players are still adjusting to life without PokerStars and Full Tilt. Some, like Barros, have turned to live poker to fill the void. Just last month, she won the Miami Poker Society's tournament, earning a berth in the Las Vegas World Series of Poker. In February, she won a $700 pot in a game at Calder Casino.

"I've learned there are advantages in live games you don't have online. I can use my feminine wiles, for one," she says, laughing. "Online, I'm a dude as far as anyone is concerned."

But the basic unfairness of being told she can't sharpen her skills on a worldwide stage sticks in Barros' craw. What's more American, after all, than using your God-given gifts and carefully honed talents to make a living?

"Poker isn't gambling; it's a skill you learn and you practice and you develop," she says. "There's a reason there aren't professional slot-machine players. I deserve to play poker again like the rest of the world does."